The concept of tokenization has been around for quite a while, with the idea of translating real-world assets into their digital representations for subsequent sale in the cryptocurrency domain in the form of tokens. By creating such a virtual investment vehicle, companies can tokenize anything from commodities like gold and silver to real estate, opening up opportunities for their sale on platforms in the on-chain environment. The latters offers considerable liquidity inflow options, given that it is more accessible to non-institutional and retail investors with no access to traditional sales venues. Most importantly, tokenization leverages all of the key benefits of the blockchain, including transparency, a peer-to-peer basis that involves no intermediaries, and lower overall costs.
Tokenization is also a powerful instrument for attracting liquidity and empowering speculation, which ultimately raises the value of the tokenized asset on secondary markets. The peer-to-peer basis is what makes tokenization most attractive alongside the universal ability of the blockchain to create a digital twin of any asset in the real world.
In this material, we shall delve into the intricacies of real-world asset tokenization and explore some of the main opportunities that such an option provides to both businesses and users.
Tokenization – The Benefits
Fractional ownership is a key term of tokenization that has been used for over a decade to signify that a single whole real-world asset can be owned by multiple individuals who buy shares of it in tokenized format. This means that a business can sell anything from a work of art to a real estate property to multiple individuals at the same time. The business does not ultimately care who or how many individuals or parties purchase an asset, the important thing is to sell it. Tokenization allows this by giving a large number of smaller investors to acquire shares of a larger property or asset that would otherwise have been inaccessible to them.
Tokenization of real-world assets is most commonly associated with stablecoins when it comes to fiat currencies like the US Dollar, or any other. USDT Tether is an excellent example thereof, which can be successfully translated to other types of currencies or real-world assets. Tokenization is a major driver of digital asset adoption, since real-world assets, or RWAs, are quite expensive and are becoming inaccessible to a growing number of investors due to their localization and sanctions regimes. The blockchain and tokenization erase those barriers and open up investment markets to retail investors with small amounts of capital.
The Boston Consulting Group forecasts that the market for tokenized assets could mushroom to $16 trillion by 2030. This is based on estimates of the market and how firms are experimenting with tokenization in the on-chain domain. Though still largely isolated to TradeFi, tokenization can explode with the advent of Web3.
The Limitations
Though the benefits and prospects of tokenization seem bright, there are a number of serious challenges that impede its development to the level required for it to become a truly global phenomenon. The main hurdles are actually technical, rather than isolated in the minds of investors. On the contrary, investors are eager to explore the possibilities of tokenized real-world assets, but technical limitations like infrastructure interoperability and blockchain bottlenecks do not allow for mass adoption and implementation.
The recent developments in the blockchain domain, however, allow experts and analysts to predict that these limitations can be overcome in the near future. The fact that firms like Hamilton Lane and JP Morgan are developing tokenized asset projects is a good illustration of such assessments. The ease with which structured instruments and index-based products have been transferred on-chain gives these firms reason to believe that real-world assets will attain a similar level of popularity and a warm reception on the part of investors.
Bonds and equities are the next logical step for tokenization, with commodities like gold, silver, art, real estate, and any other type of asset soon to follow. Use cases of fractionalized ownership of artwork are already available and have been proven to be successful. But the biggest market for tokenized asset ownership is the real estate market. Complete digitization and near-instant settlement are the main benefits to be had, since they will open up the market to a completely new audience of buyers who had only dreamt of owning a share of a luxury property before.
Critics and skeptics would state that the actual use of owning a tiny fraction of a luxury property is moot at best, but they are neglecting the main benefit – speculation. Real estate is only gaining momentum and appreciation as an investment asset, meaning that tokenized fractions of real estate will reflect that, allowing them to act as value carriers. This also makes investments more accessible and can result in the explosive growth of the industry, which has suffered significantly as a result of the Covid pandemic and ensuing global crises.
Another major hurdle is the question of regulation, which is completely reliant on the stance of governments towards cryptocurrencies. The challenges that impede the rapid adoption of tokenized assets include risks associated with cryptocurrency fraud and the lack of clear guidelines that would define such assets in many jurisdictions. Should universal guidelines be introduced, they would launch a truly global scale of real-world asset tokenization on both the institutional and retail investor levels. However, at present, this prospect is distant at best, and most investors will have to contend with either localized investments in real-world assets, or deal with risk management.
The Future of Tokenization
Almost anything can be tokenized, ranging from real estate and commodities to agricultural goods and merchandise. This opens up vast opportunities for businesses to sell their products and services in the Web3 domain to a completely new audience of investors. The progress already being made in the United States on the legislative level aimed at recognizing the status of tokenized assets means that adoption is sure to accelerate.
Available forecasts provide valuable insights into the future of tokenized real-world assets, which are currently valued at $300 billion. Projections until 2030 indicate that the market could grow to as much as $10 trillion, according to Roland Berger, a 40x increase of the present value in 2023. The same analysts state that such estimates are conservative and based on current bearish market statistics. Should the market grow in light of the resolution of global conflicts and the lifting of restrictions, we could witness a significant boost in investments directed at real-world tokenization instruments.
Whatever the commodity or digital instrument, the blockchain can digitize it and make it available for sale. Though such an outlook makes the blockchain seem more like a huge marketplace, rather than a technology capable of being applied in many real-world industries, the fact is that Web3 is the future of real-world industries and the blockchain is its basis.
